Independent Agency Channel Achieved Record Organic Growth in 2023
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Original Article (02/29/2024): IA Magazine
The independent insurance agency and brokerage channel achieved an organic growth rate of 10.3% in 2023, according to Reagan Consulting’s “Growth & Profitability Survey,” which is the highest annual level since Reagan began its quarterly study in 2008.
Reagan attributes 2023’s organic growth rate to the U.S. economy growing faster than anticipated—with real gross domestic product (GDP) growth at 2.5%, according to the Bureau of Economic Analysis, and the consumer price index (CPI) remaining relatively high at 3.4%, according to the U.S. Bureau of Labor Statistics—combined with the hard market’s high rates and premiums.
In commercial lines, agencies and brokerages posted organic growth of 10.9%, according to Reagan’s survey, due to 2023 extending the current commercial lines hard market to six full years. Commercial property premiums rose by 11.8% in the fourth quarter of 2023, according to reports, which is down from 17.1% in the third quarter of 2023.
Meanwhile, personal lines, which historically has grown only 2% to 3% annually, reached a record 10.3% growth in 2023. The growth has been propelled by skyrocketing rates in the homeowners market after inflation has driven up building costs while personal auto rates have been forced higher by soaring auto repair and replacement costs, as well as nuclear verdicts.
The survey also found that EBITDA (earnings before interest, taxes, depreciation and amortization) margins set a new record in 2023, topping 23% for the first time in the history of the study. EBITDA margin trends correlate with organic growth trends because the majority of an agency or broker’s expenses are compensation related and when top-line growth exceeds wage growth, broker margins expand, the survey explained.
However, the record levels of profitability are surprising in a sense, explained Kevin Stipe, Reagan partner and CEO. During the coronavirus pandemic, “EBITDA margins jumped by over 2 percentage points, driven by the temporary elimination of certain selling costs,” Stipe said. “Many believed that this spike in profitability would subside once the world returned to normal. But that hasn’t happened. Instead, brokers have held on to the margin gains achieved during COVID-19—and actually built on top of them with another 130-basis point gain in 2023.”
“While higher profits are attractive, our hope is that brokers aren’t underinvesting in hiring merely to meet a margin objective,” Stipe added.
The independent agency channel also saw a new record Rule of 20 score of 22.8 in 2023, surpassing the previous records of 22.2 in 2022 and 20.6 in 2021. The Rule of 20 is derived from combining the organic growth rate with half of the EBITDA margin. A score of 20 or higher means an agency or brokerage is meeting or exceeded the historically expected investor returns for the sector.
Looking ahead, most agencies and brokerages surveyed are confident that 2024 will continue their growth, predicting an organic growth rate of 10%, with EBITDA margins at 23%. While the optimism may be fueled by the U.S. economy continuing to avoid a recession, “it is also fueled by the amazing resilience that our business has demonstrated over the past several decades,” Stipe said. “Outside investors are attracted by the unique combination of attributes that characterize our industry. As more than one investor has asked—’In what other business do the worst performers still retain 80% of their customers every year?'”